Procurement specialists are becoming all-powerful in many businesses, including insurance, where their role in the selection of brokers is expanding. But is their use good practice or simply another layer of bureaucracy?
As governments around the world hose billions to extinguish burning banks, few people would argue that better corporate governance is a bad thing. But, for brokers, it has meant refashioning their relationships with clients and facing up to a fundamental change in the way they themselves are appointed.
Broker selection is increasingly mediated by procurement specialists, usually a separate in-house department responsible for getting the best deal on everything a company buys. They work with the traditional purchaser of insurance – the risk manager, company secretary or finance director – but now take a leading role. The more a company spends on insurance, or the more central it is to their business, the more likely a procurement department is to get involved.
“Companies are generally going through greater governance in everything they do,” says Willis Employee Benefits’ managing director, Tony Powis. “They need to demonstrate that they follow particular processes for the selection of an insurance broker or employee benefit consultant. Most large employers have procurement departments, and the medium-sized ones will go out to specialist firms.”
Insurance is, in fact, the last bastion of the old way of doing things. Over the past ten years, procurement departments have played a growing role in bringing structure and rigour to the purchasing process, and driving down the costs. They have also, some argue, brought more bureaucracy. But it’s only in the past two years that they’ve become significantly involved in the selection of brokers, though rarely as yet in the actual buying of insurance.
The finer details
When Airmic investigated the use of procurement departments in 2006, it found they were involved in almost a third of tenders. It hasn’t repeated the exercise, but technical director Paul Hopkin thinks the recession will inevitably make cost-cutting a central concern – an area where procurement departments excel.
“Procurement people are seen as very effective in striking the lowest cost deal,” he says. “Their involvement pre-dates the recession, but it’s becoming more common. All purchases are under more scrutiny than they were two years ago.”
Airmic is now working with the Chartered Institute of Purchasing & Supply on a guide to buying insurance for procurement staff.
Powis estimates that about 60% of his tenders are now mediated by procurement departments, usually beginning with a formal request for information that might have up to 200 questions. “It can get very detailed. Lots of the questions are fairly standard, asking for copies of reports and accounts, details of our CSR policy and so on. The cost of new business acquisition has increased, without a doubt, by approximately another one and a half days’ work per tender, because of the amount of detail required.”
Despite the extra work, Powis much prefers this way of doing business, particularly as an incoming broker. “Procurement has brought a lot more structure and a good deal more transparency to the process, and this is welcomed,” he says. “From a new business perspective, you tended to build a relationship with the finance director, HR director or risk manager before you had the opportunity to tender. In this process, the relationship is moved to the side.”
Whether a broker inwardly cheers or groans at the sight of a procurement officer in the room tends to depend on whether or not he or she is already working for the client. Hopkin says that many people believe that if procurement is involved as well as the risk manager, a change of appointment is more likely. “When you think about it, it isn’t a review driven by a relationship … it’s more objective. There’s a greater willingness from the point of view of some brokers to take part when they feel there’s a level playing field.”
Warren Dann of Jardine Lloyd Thompson agrees. As a partner in the global risk solutions division, responsible for sales and marketing, he comes up against procurement processes in about a third of tenders. “They adjudicate the process very well and keep it fair and running to time. They’re a bit like the Inland Revenue – they are approachable, as long as you don’t push it.”
Since he joined from Aon last October, Dann has set up a bid management team to process all JLT’s tenders and put them into the right format. “We’ve got our own procurement director too, so if we don’t understand what they want out of the tender, we take our procurement director along to the Q&A. When two are talking to each other, it becomes a different language.”
Dann says that, once you get used to it, the new system can cut costs. But as an elected broker it can be strange when your client enters an effective purdah when your appointment is under review. “Procurement does protect the buyer, so no one’s getting at them,” says Dann. “When you’re the incumbent broker, it feels a bit strange to be alienated from your relationship with the client. You’ve just got to follow the rules.” There’s also the threat of being disqualified; if a broker is asked for a conceptual tender but approaches the market, for example.
Powis says that the challenge of a more removed process is to work out exactly what the client is looking for, something that is even more difficult when you’re dealing with an external procurement firm. “We are very dependent on these people picking up and being able to communicate the philosophy of the company and their objectives,” he says.
Sometimes the initial form will be followed by a Q&A session with the procurement team and insurance buyer, but others take place behind closed doors, and brokers must submit any questions in writing within strict timescales.
The more worrying aspect is the inevitable emphasis on cost, and the difficulty of assessing a professional service and complex product like insurance using tick boxes. Procurement departments have built up their status by demonstrating savings achieved, for example, by going back to a winning bidder and asking them to knock a further 5% off their fee to secure the contract.
Powis says Willis tries to demonstrate to the procurement department the worth of the broker’s service from the start of the contract. “Even after we’ve won a piece of business, we continue to engage with the procurement team to demonstrate our performance against the original RFP (request for proposal) and to help them focus more on our value proposition rather than pure price. Within a three-year period, procurement might be involved again if the company goes out to review.”
In some companies, however, procurement staff are involved throughout the life of the appointment, checking the broker’s progress against the service levels agreed in the tender.
Going, going, gone?
A more disturbing development is the use of reverse auctions. Powis recently took part in an e-auction for a large IT firm but he’s hoping it won’t catch on. “It’s very much like eBay but the numbers go down,” he explains. “We will be invited to complete the RFP, which will detail the service provided, and then the window is open for about an hour and you can put in prices. We will bail out after a certain price, as our philosophy is quite simple. There’s a price for delivering a service and we won’t take business on at a loss.”
In theory, the client should have been taking into account the different proposals the bidders put forward as their prices came in, but the reverse auction method doesn’t appear to lend itself to a considered evaluation of the nuances of the proposals.
At accountant Grant Thornton, insurance consultant Ipe Jacob doesn’t believe that procurement can suss out the most important aspect of a broker’s performance: its access to the market. “It’s a bit of a fallacy to say that all brokers are equal in that they can provide the best market price for their client. I don’t think you can judge that through a procurement process where you rank people using this set of 722 criteria and their diversity policy. It has to be very subjective, based on knowledge. You look at their record, who they know, the prices they deliver, talk to individuals you know. You can’t go through a formula.”
Jacob sees the move to procurement as a self-perpetuating cycle of administration that obeys Parkinson’s Law, which says that work expands to fill the time available. The tide will turn, he believes, but not for a few years yet and only after firms have noticed the system has failed them. “Procurement departments may at times deliver value by knocking off 10% but they increase costs all round,” he argues. “In insurance, it doesn’t really work. Procurement will play an ever greater role until people realise it’s not the best way to make the decision.”
Until then, there’s no point trying to buck the system, according to Heath Lambert’s managing director of products and markets, Graham Barr, who now works with procurement departments on between a third and a half of tenders.
“It’s just the way of the world,” he says. “There’s not an awful lot of point ranting and railing against it; you’ve got to go with the flow. Once you’ve adjusted, it’s arguably more efficient. At least you’ve got something definitive to respond to. Something open-ended can take more time.
“They will have given the tender brief a lot of thought. It’s like an exam question: you can’t deviate from the questions by trying to be clever or thinking you know better. A relationship will get you so far, but you’ve got to be able to articulate your knowledge and experience.” IT